Houston’s economy continues to add jobs well above the pace of the nation and in other large metropolitan areas. The unemployment rate in April was 4.6%, far below the national rate of 5.9%, with more than 85,000 jobs added over the last 12-months. The rate of job growth has averaged between 3% and 4% since the end of 2011, and is projected to remain above 3% through 2016 according to Moody’s Analytics. The energy industry is the primary driver of Houston’s economy, with manufacturing, distribution and logistics, the Port of Houston, health services (including biotechnology), and aerospace all contributing significantly to the region’s economic base.
Strong job growth has driven all facets of Houston’s real estate market. More jobs have contributed to a significantly growing population, in turn fueling the need for new housing, office space, industrial facilities, and retail development. In all property types, falling vacancies, increasing rents, and increasing construction have been the prevailing trends in most areas of the city since 2011. Absorption of space in general has been strong but not exceptional, as less vacant space has been on the market to be taken up. Investment sales for office and industrial product increased dramatically from 2011 to 2013, with some slow down in office sales transaction volume thus far in 2014.
The office market will be defined by new construction in the next three years. With vacancy rates falling and rental rates increasing since 2011, 9.1 msf were under construction at the end of first quarter (the most of any market nationally). This number does not include approximately another 6.0 msf under construction as owner-occupied projects. Houston will lead the nation in new office construction through at least 2016, surpassing even much larger markets such as New York City, Chicago, and Los Angeles. With vacancy currently low, the possibility for very strong absorption is likely over the next three years as this construction is delivered. On a net basis, however, as companies take space in these new projects or move into owner-occupied facilities, the question of existing space entering the market as vacant looms on the horizon, and could offset the absorption of new space. Continued expansion in the job market and population will be the key determinants in how the office market performs during the next three years.
The industrial market is undergoing exceptional growth in new construction, although it has yet to reach the same level as just prior to the recession of 2008. As of first quarter, 8.3 msf were expected to be completed in 2014. Vacancy rates for industrial have been running at historic lows for several years, and this new construction will add badly needed space into a tight market. Corridors for growth include the Northwest, North, and Southeast portions of the city to take advantage of natural conduits such the airport and the port. Both the global and national economies are key to Houston’s performance.
Multifamily construction has increased in the past year, as the need for housing continues to grow with population. Single family home sales in April showcased the extremely low inventory available for sale citywide, with sales volume relatively flat but median sale prices increasing. Retail development has followed suit, with grocer-anchored centers most prevalent as new neighborhoods are constructed. Growth patterns for residential and retail development continue to be west and north of Houston.